Tax planning is tax-compliant behavior, but there is a grey
area between ‘tax planning’ and ‘tax avoidance’. As part of good governance,
companies will seek to minimise their tax liability through tax planning, making
the most of the tools and mechanisms which the government makes available to
them specifically for this purpose via allowances, deductions, rebates and
exemptions. However tax avoidance, while legitimate, can be seen as aggressive
when using financial instruments and arrangements in such a manner that was not
intended as, or anticipated by, the government as a vehicle for tax advantage.
The use of overseas tax havens is typically the example cited.
treasurers will have the responsibility of the tax function, or if they do not
they will work closely with their tax colleagues to find the most efficient ways
(from a tax point of view) to structure transactions. A treasurer’s expertise
lies in their knowledge of the flows of interest or currency using complex
financial instruments and possibly cross border transactions.
Avoiding tax and bending the rules of the tax system is not illegal, unlike
tax evasion, as it is operating within the letter but perhaps not the spirit of
the law. Treasurers might be complying with the law – but is it ethical?
Tax as a Social Responsibility
At a time when government spending
cuts in Europe and North America are having a real impact on the everyday lives
of people, from the public’s viewpoint how can multinational corporations (MNCs)
be avoiding paying their fair share of taxes? As UK business secretary Vince
Cable said: “Systematic tax avoidance by rich individuals and UK-based companies
strikes a particularly ugly note in these straitened times.”
latest Institute of Business Ethics (IBE) survey carried out by Ipsos MORI, tax
avoidance was the second most important ethics issue that the British public
think business needs to address. Avoiding tax is avoiding a social obligation.
Starbucks and Amazon were vilified and boycotted as a result of their tax
policies. Tax avoidance can make a company vulnerable to accusations of greed
and selfishness, damaging its reputation and destroying the public’s trust.
Paying a ‘fair’ amount of tax in the countries across which they operate is
seen as the socially responsible thing for companies to do: providing the funds
for public services such as healthcare and education and for investment in
infrastructure, which companies benefit from either directly or indirectly. Tax
avoidance has been branded by some as an immoral and unethical practice that
undermines the very integrity of the tax system.
however, that their responsibility is to maximise the value that they deliver
for their shareholders, which includes keeping tax costs to a minimum within
the realms of what it legal. Aside from corporation tax, businesses should be
acknowledged as contributing to the economy in other ways; in the UK this is via
pay as you earn (PAYE), national insurance (NI) contributions and business
rates. In some countries they can contribute through agreements to pay
An Issue of Fairness
Many multinational corporations
(MNCs), apparently operating very successfully in the UK, are paying little or
no local corporation tax. The media often forget that corporation tax is a tax
on profits, so if a company makes no profits, it should not have to pay
corporation tax. The issue is whether the profits are calculated correctly.
There is much public confusion between sales and profits – it is plausible that
a company has high sales, but pays no tax as it may be making no profit.
In its latest estimate, Her Majesty’s Revenue and Customs (HMRC) put the tax
gap figure, the difference between the amount of corporation tax actually
collected and the amount that should be collected if all companies complied with
‘the spirit of the law’, at £4.1bn.
Some campaigners believe that the real figure could be £12bn or more*.
According to a 2011 ActionAid report,
98 of FTSE100 companies use tax havens to reduce their corporate tax bills.
The public expects businesses to pay their fair share of tax but what
constitutes a ‘fair’ amount is subjective. In 2008 HMRC declared that “we want
to make sure that the burden of tax does not fall unfairly on taxpayers who play
by the rules and pay their fair share,” but it gives no definition of what is to
be regarded as ‘fair’.
In the UK, the proposed introduction of a General
Anti-Avoidance Rule (GAAR) is designed to provide some clarity around what is
tax avoidance, what is acceptable and what is not. It is intended to prevent
those tax schemes that the government deems to be abusive and which prime
minister David Cameron has described as “morally wrong”. However, legislation
which centres around ideas of what is ‘reasonable’ behaviour is still too
subjective and not easy to define. What businesses most want out of a tax system
is certainty – they want to know what their tax bills will be so they can plan
their strategy and investments accordingly.
In Australia, the tax
planning industry needs to get clearance for any new tax planning scheme in
advance. This would help to give clarification of what is ‘fair’. Tax policies
should be underpinned by the guiding ethical principles of accountability,
transparency and consistency. Tax planning arrangements that go beyond the
policy intent of the law and involve deliberate approaches to exploit the tax
system are not ethical; it’s as simple as that.
Yet it could be argued
that the corporations are ‘piggy in the middle’ here. If companies consider it
to be their fiduciary duty to maximise profits for shareholders, institutional
investors (which include pension funds and savings accounts) benefit. Is this
not a benefit to society?
It is perhaps time for the general public to
start paying more attention to where their money is invested. Many investment
firms with a socially responsible mandate claim they do take account of
companies’ tax practices when deciding where to invest, but few actually screen out companies over tax issues.
However, the FTSE Group has said it is looking into excluding companies with
what it called ‘overly aggressive tax reduction policies’ from its ethical index
group, FTSE4Good. No timings have been confirmed on this move, but the FTSE’s
stance may reflect a future trend.
Arguments for and against tax avoidance
are missing the point. It is perhaps politically too complex to argue that
companies pay more tax, but government and business should ensure that corporate
tax contributions are a demonstrably fair return to society.
hiding behind the business case for tax avoidance, businesses need to be
transparent about their tax planning. Both companies and government need to pay
more attention to communicating their position on this issue; their
interpretation of the law; and above all to be open about it. This would restore
public trust and bring more certainty for business.
What role can
treasurers play here? As individuals, because of their roles as ambassadors for
the company both internally and externally, it is important that all treasurers
‘set the tone’ and behave with the highest ethical probity. Viewing tax
planning, as with any business transaction, through an ethical lens can help
ensure that the decisions are made with integrity.
Asking the questions:
“Is this fair?”; “Would I like my family knowing what decisions I have made?”;
“Would I be happy reading about this in tomorrow’s paper?” – can help focus the
mind ensure that the right decisions are made for the right reasons.
Briefing from the IBE on this issue will be available at
*Richard Murphy of Tax
Research UK: www.taxresearch.org.uk
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